Low Budget Choices to Build Passive Income

A lack of time can affect your ability to pursue additional income, while low cash balances may restrict business opportunities.

So, how can you improve cash flow to invest, slash debt or build an emergency fund?

The Need to Build Passive Income:

Unlike most jobs or businesses, passive income earns money without having to work. Little if any maintenance is needed for passive investments. Additionally, you can start with under $100 and use the power of compounding to build a portfolio.

Here are passive income strategies for all budgets:

Peer to Peer Lending:

The micro loan concept first gained popularity with success in third world countries, where it has helped reduce poverty. Venture capital continues to fuel innovation that doesn’t meet rigid bank criteria. Various niches in non-traditional financing have developed.

On a smaller scale, peer to peer loans are made to individuals and organizations. The purposes range from starting a business to social causes. Several crowd funding sites are available and screen applicants by unique criteria. Some existing platforms include lendingclub.com and prosper.com. Most loans are shorter term investments with low minimums. Peer lending sites may cap the amount you can lend to each borrower.

Loans are assigned ‘grades’ based on risk. Be sure to understand what factors the site evaluates when assigning these grades.

Peer Lending Strategies:

Consider building a laddered peer loan portfolio. For example, make 1 month, 3 month and 6 month peer loans. This strategy creates a steady stream of income to reinvest.

Small doses of lower grade loans can be mixed with higher ratings for an income boost, as well. The risk premium for lower quality loans carries interest rates that can pay 3 times that of higher grades.

Making multiple smaller loans helps reduce risk compared to a focused portfolio. You can diversify across lending platforms, maturities and loan grades with minimum capital.

REITs are low cost alternatives for real estate exposure without the hassles of ownership. These are corporations that invest in properties and collect rent, or lend money to earn mortgage interest. Hybrid REITs own real estate and loans. REIT mutual funds and exchange traded funds (ETFs) are convenient ways to buy these securities.

As the REIT collects rental money or interest income, cash dividends are paid out to shareholders on a monthly or quarterly basis. Unlike owning real estate, REITs are liquid investments that can be quickly sold.

Owning REITs may also reduce risk in your overall portfolio, as real estate has a negative correlation to other asset classes, such as bonds and stocks. REITs are best considered if you already have core investments, such as mutual funds or individual stocks.

REIT Investing Ideas:

Various economic and demographic trends may bode well for certain REITs.

Healthcare REITs: An aging population and insurance overhaul could make Healthcare REITs a compelling story. Investors may look to REITs that invest in medical complexes, such as senior care centers.

Foreign REITs and Weak American Dollar: Investors mostly have limited access to foreign real estate markets. Global REITs allow you to invest in overseas property markets in a way otherwise not possible. With a weak American Dollar, your passive income may get a boost when converting foreign currencies. Your currency adjusted total returns may also increase with a sagging dollar.

Summary:

Increasing your sources to build passive income improves cash flow for financial security. Peer lending and REITs are low cost options available to budgets of all sizes.

Aside from money, these investments also save time, which is perhaps the most important asset of all.

Comments

As a long time investor, I am a huge proponent of using REITs for passive income. They are very predictable and payout substantially more than any other type of dividend. And you are right, the health care ones are the place to be for the next 20 years!

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